Revision Notes

Article Index

Interest on Capital

Partners who contribute more capital than other partners are granted interest on capital. It is calculated on the capital at the beginning of the trading period. If the partner brings in additional capital, interest will be calculated for the period beginning from the date the capital is injected into the business.Interest is deducted from the profit and the remaining profit is divided among the partners.

Interest on Drawings

Withdrawals made by partners from the firm are known as drawings. These drawings may be in cash or in form of goods. The firm charges interest on these drawings. The interest is calculated for the period beginning from the date of withdrawal to the end of the trading period.Interest on drawing is debited to the Current Account of the partner who makes the drawings.

Loans from Partners

When a partner makes a cash loan separate from the capital, it is credited to the partner’s Capital Account. A separate Loan Account is created and credited with the loan amount. The amount received by the firm is debited to the Cash account.Interest is payable to the partner who makes the loan. The interest amount is

Credited to the partner’s Current Account.

Loan Interest Account is debited as it is an expense for the firm.

Partners’ Salaries

Salaries paid to the partners is Credited to their respective Current Account If Salary is paid in Cash, then Cash Book is credited instead of Partner’s Current Account, Debited to Partnership Salaries Account which is later on transferred to the Profit and Loss Appropriation Account.